asset management due diligence

Global money laundering fight heaps pressure on asset managers


The EU’s latest changes to money laundering regulations underline the need for asset managers to defend against constantly changing financial crimes with effective due diligence systems.

The push to strengthen anti-money laundering (AML) regulation is not confined to the EU – many jurisdictions around the world have been doing the same, including Singapore, Ireland, Bermuda and the Channel Islands.

But the EU’s fifth money laundering directive (5MLD), which member states had to adopt by January 2020, is a major move as it will affect any asset manager doing business in the trading bloc. It is part of the European Commission’s wider bid to strengthen the fight against terrorist financing after the 2015 terrorist attacks in Paris.

5MLD also follows several major enforcement activities against large financial organisations in recent years for inadequate anti-money laundering (AML) controls leading to financial crimes.

Enforcements have taken place in many countries – from Holland to Australia and Germany – and led to billions of dollars of fines.

Closing loopholes

One goal of 5MLD is to close loopholes in member states with lower requirements for enhanced due diligence (EDD) for high-risk customers. To address this, the directive clarifies and harmonises the EU’s EDD requirements.

Financial firms, including asset managers, must now consider additional high-risk factors when assessing the need for EDD, and seek more information and monitoring in certain cases.

Asset managers must also now update records relating to the beneficial ownership of corporate clients, record any difficulties in identifying beneficial ownership, and understand the control structure of their corporate customers.

Heightened risk

According to UK regulator the Financial Conduct Authority (FCA), the risk of money laundering (ML), and bribery and corruption (BC) is heightened in some areas of the asset management sector. These include selling investment products where third parties raise money; firm’s dealings with clients; and the search for information to gain competitive advantage.

Factors that may increase ML risks include:

  • non face-to-face business, which can attract money launderers with stolen or fabricated identities
  • customers with links to high-risk countries
  • wealthy and powerful clients, particularly those who insist on strong confidentiality
  • offshore trusts and shell companies that distance beneficial owners from their funds
  • high value and or unexpected transactions
  • payments to third parties without a clear business rationale

Consistent failures

Asset managers already have rigorous customer due diligence (CDD) requirements in the areas of AML and counterterrorism financing (CTF), anti-bribery and corruption (ABC), source of wealth (SOW), Foreign Account Tax Compliance Act (FATCA), Bank Secrecy Act (BSA), and know your customer (KYC), among others.

CDD should cover all types of financial crime including: tax evasion, human trafficking, narcotics trafficking, securities fraud.

But this complex framework of rules can be challenging to implement effectively across the globe and consistent themes have been emerging about failures in AML systems and controls.

For example, the FCA’s review of asset manager systems and controls for AML found most asset management firms had inadequate systems and controls for identifying, assessing and managing ML, bribery and corruption risks.

ML risk assessments were sometimes not undertaken; not documented; lacked appropriate consideration of risks; were limited to one element of risk; or not used to inform control implementation. Risk assessments were too infrequent at most firms.

At one firm, 60% of files had limited evidence of consideration about the risk posed by new customers; and limited evidence about beneficial ownership and source of wealth.

Patchy picture

Another FCA review looked at investment banks, investment exchanges, a custodian bank, clearing and settlement houses, inter-dealer brokers and trading firms.

The picture was equally patchy in this area of the investment chain. The FCA found participants need to do more to fully understand their ML exposure.

Most participants had no visibility of beneficial owners of assets traded; and some participants had not assessed ML risks in their business at all.

Accountability for ML risk in the first line of defence needs to increase, rather than be viewed as a compliance or back-office responsibility, said the FCA.

It drew parallels with one of the big enforcement cases mentioned in the introduction. In that case, the first line of defence failed to instil responsibility for management of CDD.

How technology can help

Chris Laws, head of product and strategy at data and analytics provider Dun & Bradstreet, says the global asset management landscape is becoming more complex with increasing legislation and regulatory pressure. Managers must use technology such as data and analytics to gain a full and transparent view of entities they are considering doing business with or investing in.

‘Information such as beneficial ownership data and corporate linkages can reveal direct and indirect connections, and help protect against the risks of regulatory fines, financial loss and reputational damage,’ says Laws. ‘Businesses can use analytics and other technology such as artificial intelligence and machine learning to accelerate the due diligence process and verify the identity of companies and individuals.’

Streamlined systems

The EDD requirements for onboarding a high-risk asset management customer can make it challenging and expensive. For example, asset managers need to search beyond standard adverse media providers, such as searching local court registers to determine detailed risk factors.

To address these and all the other issues mentioned in this article, asset managers need to improve due diligence, by running KYC, AML and EDD processes quickly and confidently with better data, in a more integrated environment where information can be shared across teams and departments.

Companies need a platform that can do all this for them digitally, in a way that ensures full compliance and a more streamlined approach. Their CDD system should also reduce quality assurance failures, helping them save significantly on costs, improve regulatory confidence, and gain a deeper understanding of processes.

The platform can then extend beyond onboarding towards ongoing research and monitoring against EDD requirements.

For asset managers, such a system could also potentially do research and due diligence on investee companies and, for multi-manager funds, on other fund managers.

By combining all these gains in one system, the right provider can become a powerful partner for asset managers.

Tim Cooper

Award-winning financial journalist, has written regularly for publications including The Times, Sunday Times, The Spectator, London Evening Standard, Guardian Weekly and Weekly Telegraph.